Friday, July 31. 2015

Uber Technologies Inc. has closed a new round of funding valuing the five-year-old ride-hailing company at close to $51 billion, according to people familiar with the matter, equaling Facebook Inc.’s record for a private venture-backed startup.

This is...extraordinary, for a business that essentially bases all its economic value on arbitraging a section of the labour market, essentially the newly emergent (and thus poorly regulated) zero-hours-contract, dead end contract job market, or whatever the equivalent is in whichever country you look at. History tells us this will inevitably be regulated at some point in OECD countries.

Plus, all public service markets (like taxis, hotels etc) were eventually regulated to protect providers (eg drivers) and customers (eg passengers) after the inevitable high profile abuses, this one will be too at some point. (The recent scalping of Uber customers in London during the Tube strikes didn't help their cause)

But also what also fascinates me is the view is that it is a sustainable high margin business among many people who really should know better, i.e. those handing over the money at these values, with all that implies. The dream is that efficient algorithms match supply to demand and the customer pays the value added surplus. That is fine in startup scale, when most customers are time starved salarimen with brass in pocket, buts its not a mass market proposition. The cost of running a taxi is little different no matter who is running it (unless you want people to skimp on all those regulated issues like maintained cars, drivers licences etc...), so when it tries to scale to this valuation it is going to have to offer rides to teh kless cash-flush hoi polloi. So unless Uber is being run as a not for profit (and the $50 bn valuation rather belies that) then the bulk of the money taken out of the business model will be from the drivers' wages. And when that is dis-allowed (see - skimping, abuses, etc above) , where are the margins and who takes the hit?.

I guess its more that the backers are betting on Uber being able to lobby like hell avoid regulation of their part of the taxi labour market until after they IPO* (Or get rid of the taxi drivers and replace with AI cars before the proverbial hits the fan? )

Do you believe this will lead to higher or lower standards in the industry? Do you believe that there will be public pressure to regulate this part of the taxi industry? Do you believe it will come sooner, or later?

Answers on a share application form for the impending IPO.....

BTW - there is an implication for all those building the "Uber for X", they maybe better think carefully about their business model (or their IPO date), as it will probably have the same (low) returns that the other regulated players they are trying to disrupt have, unless there is some other cost pool in that X value chain they can take surplus from other than arbitraging unregulated labour. (Hint - one doesn't get Unicorn values if one takes it from one's own cut...)

*Definition of IPO post Facebook - to sell unicorn-poo for a lot of dollars to those people who believe in unicorns

Monday, July 6. 2015

For those who are surprised and shocked by the popping of the Chinese stock market bubble, can we point you to the Broadstuff Bubble-O-Meter which says that, when taxi drivers give you stock tips and private citizens gamble their savings it really is the endgame of the bubble, and the next step is "pop"

Addition from the "we didn't tell you this though":

And right to the end, those with financial interests in the bubbletime, and their mouthpieces, will insists that there is no bubble.

Wednesday, October 8. 2014

Here’s the problem. Every venture capitalist, in every interview they’ve ever done will tell you the same casual lie: That they invest in people first and ideas second. They’ll tell you they invest only in people they’d want to work with. They’ll tell you that they have the luxury to say no to companies that don’t do things in line with the way they like to work, the way they like to treat people.

You don’t have to look too far into this year’s frenzied pace of dealmaking, and at the price tags of those deals to know that’s complete bullshit. In all too many cases, what venture capitalists are investing in is assholes.

It’s weighing on those who’ve been in the business for decades, and I’ve been having conversations about it all summer. A senior partner at a top firm recounted a partner meeting at breakfast recently.

“Why are we backing this guy?” he said to a younger rainmaker at the firm. “He’s an asshole.”

His partner replied: “Hey, you gotta get over it. It’s no longer about whether someone is an asshole it’s about can he make money.”

That conversation happened a year ago. Said this multi-decade veteran of the business: “It didn’t use to be that way.”

Possibly, but looking back at the dotcom era one can argue that it gets that way as the cycle moves up to Maximum Froth, in my experience the Asshole count and valuations both went up exponentially as the froth rose in the dotcom era. At its height anything and everything was funded, and some of those people were very definitely many cards short of a deck. To me it's more a sign we are starting to see the Froth appear in the current "Tech" bubble (though, to be pedantic, most of these companies are not in fact "Tech" per se, in that its not their technology that is critical, they are mainly digital versions of long established services with some form of networking function overlayed on them to simplify the transaction between buyer and seller. It's the attraction of eyeballs - sorry, their traction - that is critical, as there is only space for a few winners)

The other very telling comment made in the article is this one:

At some point this business became about funding a founder, not a company. This has coincided with three other theories of venture capital portfolio management that have become prevalent of late. The first is an obsession with a VC’s “social game”—to steal the parlance of reality TV. Since 75% of venturebacked startups are destined to fail, VCs today assume they’ll do less damage overall by writing off a bad performer than doing the hard work to fix it. Even if they oust an ineffective founder, a company may be too damaged to salvage, meantime, the VC has ruined his rep of being “entrepreneur friendly” for nothing.

The second theory is the new valuation math: Given basic liquidation preferences and soft landings at bigger Valley companies, the risk to losing all your money is somewhat protected. Likewise, companies like Facebook and Google have thrown traditional valuation math out the window too, caring only if someone might disrupt them in another ten years.

So the only thing anyone cares about is the upside. VCs—in this point in the cycle—are smart to worry less about erring on the side of paying up too much for a deal than erring on balking at a seemingly high valuation. Especially when the next day Mark Zuckerberg could rewrite every rule by paying $2 billion for a hardware company that doesn’t even have a product on the market. As Bill Gurley of Benchmark says, “You can only lose your money once” if you invest. If you don’t, you can effectively lose that would-be appreciation many times over.

Is it the mantra of a bubble? Maybe.

I love how even the Valley pundits who insist they are "telling it like it is" shy away from the "Bubble" word - these above two point perfectly express the "game theory" of a Bubble dynamic. Anyway, on with the point:

The third change that rules venture decision making is an acceptance that no one has any clue of what works.

.....

The determiners of success in the Valley are no longer CIOs deciding on huge iron boxes that cost millions a pop. It’s not even whether geeky early adopters will like Twitter or FriendFeed more. It’s what teens around the world want to do on their phones. A hot mobile app has more in common with a movie premiere than a classic Silicon Valley tech company. And increasingly, VCs know they have no clue what’s a good idea and what’s a bad idea. Better to back all the apps showing “hockey stick growth” on college campuses.

This also is a descriptor of the beginning of the Frothy phase of the dotcom era - no VC knew what would work then either, so they invested in a huge range of patently daft ideas, praying for a few nuggest, because to not do so was job-risking. If one VC made a big play in a sector then the others piled into every other player in that sector (and by the end, even manufactured their own plays like pop svengalis manufacture boy-bands). Now to be fair, the sort of person who can set up and build a billion dollar company is seldom going to win the "person most admired for being nice and honourable" awards, and as Pando points out, the process of getting a company off the ground can make someone into an asshole - but Pando thinks This Time it is DIfferent:

The other sad reality is the continual erosion of what Silicon Valley—as a place—stands for, if anything. This used to be a place of misfits and changing the world. Even the legendary assholes had a cause beyond themselves and checks and balances on their board. It just may take another economic collapse to get back to that.

Pando also argues that the reduced cost of setting up a company has changed the power dynamic, but while that's true in the down-cycle and early up-cycle, by the time the Froth appears money is not the issue anymore. To me, this looks very cyclical. At the top of the dotcom bubble it wasn't about changing the world either, it was about get rich quick. Bubbles attract assholes, and they disappear again when times get hard. If you want to find a low asshole industry sector, look for ones in trouble - the mid 'noughties Valley was just that, and was arguably more asshole free than average.

And we are enetring the Frothy time, so expect the asshole count to increase. Then there will be a crash, a collapse, and things will go back to being more asshole free again - until the next bubble starts to froth.

(Update - a friend of mine pointed out that what I reallyw as saying is that asshole density is a measure of bubbletime, so I have changed the title to that ffrom my original)

Wednesday, June 18. 2014

People Invested $1 Million In An App That Just Says ‘Yo’
"It’s not just an app that says Yo,” says Mr Arbel. “It’s a whole new means of communication"

'nuff said... are we getting to an age when every startup gets $1m just for existing? Will tomorrow see $1m for an App that says Ni! ?

As was noted by James Surowiecki* in the New Yorker, the problem is increasingly not getting started and seeded these days, its finding a way out the Darwinian stew of all the other crap ideas encouraged to start up - and this ain't the way to fix that.

Tuesday, April 29. 2014

So, Twitter posts perfectly good results that make perfectly good sense for it's business progression, yet the stock falls sharply (down 10% at one point in aftre hours trading).

Why?

Well, unfortunately for Twitter, the Bubbletime Punditocracy wants to believe its a $50 stock, despite its fundamentals (which are very well known) implyingits more a $26 stock (it's IPO price). Twitter is what it is, and hasn't changed its model dramatically since its IPO, and its track hasn't shid=fted much from then - so its hard to imagine why its value should be be double its IPO valuation - Irrational Exuberance and Irrational Analysis at the same time.

To quote that great tech stock analyst, Mr D Bowie:

"And I want to believe in the madness that calls now
And I want to believe there's a light shining through somehow
And I want to believe, and you want to believe
And we want to believe"

Facebook had the same problem, the Punditocracy was desperate to believe it was something it wasn't, it took them a good year or so to get their business to a point where it started to resemble their wishes, and its stock price driftef ever lower from its peak of irrational exuberance until that happened. Twitter is best advised to ignore the Pundits as well and just get on getting on with it.

Wednesday, March 26. 2014

It was no great surprise to us that the makers of Candy Crush, King Digital Entertainment Plc , had a less than illustrious IPO. As we wrote in February, it was high time to run for the IPO gate before it closed on them, and they have. Good luck to them, they now have $500m in the bank now, a useful cushion against the slings and arrows of outrageous future misfortune. The c £8.5bn valuation (now c $7bn) will not be quite so easy to live with, I suspect.

But nothing changes our analysis since February, this stock is a still very high risk punt, and sold at Bubbletime prices to Bubble-minded investors to boot.

Tuesday, March 25. 2014

Facebook has bought a tiny Virtual Reality company with a near-virtual product for $2bn (mainly stock) - Grauniad.

Facebook has bought the virtual reality technology firm Oculus VR for $2bn [£1.2bn], it announced on Tuesday. In a surprise revelation, the social networking company said it had paid $400m in cash and the rest in more than 23m shares, currently worth $1.6bn [£970m], plus an additional $300m pegged to future performance.

A detailed company statement said that Facebook recognised how Oculus had built a solid following among game developers with 75,000 pre-orders for its virtual reality headset, but that virtual reality technology would expand to other industries from communications and entertainment to education and media.

Kudos to Oculus, it started as a kickstarter project 2 years ago and has taken some serious funding. And actually, its likely that goggles or glasses of some sort will be the view-screen of choice at some point. This is clearly where Facebook see it going, as Mark Zuckerberg notes:

After games, we're going to make Oculus a platform for many other experiences. Imagine enjoying a court side seat at a game, studying in a classroom of students and teachers all over the world or consulting with a doctor face-to-face -- just by putting on goggles in your home.

This does point to a rather interesting tussle between Google Glasses and Facebook Goggles for nerdiest eyewear, and it also points to a new tussle for video screenware device-as-portal. But this is very early days for a virtual product for virtual reality, to go for for $2bn. Still, its all virtual money and it all works out in the Bubbletime.

Monday, March 3. 2014

In the 90's and 'Noughties I made many trips to San Francisco/ the Valley, and as the 90's dotcom bubble built up on I noticed two "non-stock" signals of its frothiness - house prices and occupation of the SoMa (South of Market) area by trendy bars and techie startups:

- House prices rose to the point that educated non techies couldn't afford them, so people like teachers were priced out. This is starting to happen again. (By the way, my "top of market" indicator was when teachers in SF/SV decided to sell and go and teach elsewhere/semi retire based on the huge house price gains)

- SOMA became littered with start up bumf, not old newspapers, and you were tripping over blue-bazered dotcommers instead of winos (SoMa to me has been the flood plain of economic exuberance in the SF/SV area, its use is a good marker of prevailing conditions) - and its filling up with DotCom 2-ers again.

Tuesday, February 18. 2014

News out today that King, manufacturers of the current hot mobile game Candy Crush, have filed for a $5.5bn IPO. We were asked what do we think?

- Based on a growth from a few $100m revenue in 2012 to $1.9bn in 2013, and real profits of c $570bn, a valuation of $5.5bn is tame by Dot Com 2.0 standards, but....
- ......King bases c 80% of its revenue on just 1 hit game
-. Hit Games come and go fairly rapidly, and there is no guarantee they can come up with a second hit game, so its quite conceivable that in another year they will be a few $100m company again, and worth nowhere near $5.5bn.
- Remember Zynga? Zynga share price collapsed after they failed to consolidate their success (see chart at top of page).
- King made c $570bn in proft last year, it has paid over $500 bn of dividends to its senior management and early investors, and its now looking for c $550 bn public investment - in normal times that counts as "things that make you go hmmmm..."
- However, its the Bubbletime (proof: Zynga shares rose after this IPO was mooted in September last year and hit a 52 week high after this IPO was announced today), so the best thing to do with a windfall year is rush through the IPO gate as fast as possible.

They may be able to replace Candy Crush with a "next hit" but the Gaming ecosystem is littered with the bones of companies that didn't The music industry's stage is littered with the bones of 1 hit wonderbands. The movie industry...well, lets see what Candy Crush 2 looks like.